Hey folks, it’s your friendly neighbourhood Dividend Uncle back again! Today, I just want to do a quick update on something that’s been driving the recent rally in Singapore REITs—up a solid 13.5% over the past month. This surge has largely been fueled by increasing expectations that the US Fed will cut interest rates by 50 basis points, instead of 25, at their next meeting on 18 September.

But, before we get too excited and pop open the champagne, let me share a potential risk that we should all be aware of. Don’t get me wrong—I’m long in REITs, and I’m not selling. I’m fully invested, but there’s something about this 50bps cut that we need to talk about. So, sit tight, because I’m going to walk you through why this isn’t a guaranteed outcome, and what it means for us REIT investors.

Before we dive in, I must let you know that this content is for informational and educational purposes only and does not constitute financial advice. The opinions expressed are based on publicly available information and personal analysis, and they are not tailored to your specific financial situation. The REITs and institutions mentioned are cited purely as examples. While I have no affiliations, sponsorships, or financial relationships with any of them, I may personally hold positions in some of the investments discussed. Before making any investment decisions, you are strongly encouraged to consult a licensed financial adviser.

The Market’s Expectation of a 50bps Cut

Right now, the market is factoring in a 69% chance of a 50bps cut, up from just 30% a week ago. This optimism has fueled the REITs rally we’ve seen lately. And why not? A deeper rate cut would mean lower borrowing costs for REITs, potentially boosting their earnings and, of course, the dividends we all love.

But here’s the catch: A 50bps cut isn’t locked in. While it sounds attractive for investors like us, many experts are cautioning against the Fed starting off with such a large cut. Why? Because cutting by 50bps at the start could signal that the US economy is in worse shape than we thought—and that’s not exactly the confidence booster we’re looking for.

What if the Fed Only Cuts by 25bps?

So what happens if the Fed only cuts by 25bps instead of the 50bps everyone’s now hoping for? Well, we might see some disappointment in the markets. The REITs rally we’ve enjoyed could stall, or worse, reverse slightly as expectations get adjusted downwards.

Remember, this recent surge is based on speculation. If reality doesn’t meet those expectations, we could see a short-term dip. And while that’s not a reason to panic, it’s something to keep in mind if you’re planning on entering the market now, at these elevated prices. Be aware of what’s already been factored in, and the risks that come with it.

The Dividend Uncle’s Take

Now, just to be clear—I’m not suggesting you rush out to sell your REITs. Like I said earlier, I’m long in REITs and holding tight. I believe in the long-term value of these investments, especially as we look beyond short-term interest rate movements.

But the point I want to make today is that we need to be cautious when markets start pricing in high expectations like this. If the Fed decides to play it safe with a smaller cut, we might see some short-term volatility. That said, I’m here for the dividends, and in the grand scheme of things, I’m not too worried about these short-term fluctuations.

So that’s it, just a quick update to keep you in the loop of the potential risks. I’m of course still rooting for a 50bps cut, but just remember that we’re here for the long term dividend income! See you next time.